Year 2021 defied the normal and kept scripting a new normal. Stocks scaled record highs, indices kept climbing upwards and set expectations of new highs every day, and the returns generated in this process were unprecedented.

Growth in the stock markets was broad based and all sectors participated in the rally. Even sectors that were stuck in the consolidation zone for long witnessed a run-up and gave robust returns for investors.

The 30-share S&P BSE Sensex generated returns of about 20 percent during the year. Comparatively, the BSE Midcap index advanced 35.8 percent and the BSE Smallcap index gained 56.7 percent. This indicated that the broader markets witnessed a real ‘boom’ during the year that’s about to end.

Mid-cap and small-cap stocks had majorly underperformed large caps for the past three years. Being cheaper, however, they grew much faster than large-caps as the economy recovered. The BSE LargeCap index gained 22.5 percent during the year.

“The key factors in driving the market in 2021 were improved macro-indicators, strong global liquidity, increased economic activities, significant pickup in vaccination, improvement in consumption-related data, ease in monetary policy and sharp recovery in corporate earnings,” Ravi Singh, vice president and head of research at ShareIndia.

The gains were also the result of increased retail participation in the equity asset class as investors thronged the markets to partake in the strong bull rally.

“No sectoral index ended in the negative, showing the underlying bullishness in the markets,” said Deepak Jasani, head of retail research at HDFC Securities.

Among sectors, fast-moving consumer goods, banks, finance, healthcare and auto were the laggards, generating lower returns than the benchmark Sensex.

Sectors performance 2712_001

The BSE Fast Moving Consumer Goods index rose 7.3 percent “as margins came under pressure as raw material prices kept rising, volume growth was patchy and there were fears of down trading due to pressure on income generation,” said Jasani.

“FMCG is among the defensive sectors that had been one of the best performers of the previous year (CY2020) but lagged behind this year as the cyclical growth took over,” said Sonam Srivastava, founder of Wright Research.

Banks

The BSE Bankex index rose 10.3 percent whereas the BSE Private Banks index rose by 2.8 percent and the Nifty PSU Bank index gained 42.4 percent. The performance of the finance sector was similar to banks and could generate 11.7 percent returns during the year.

“Banks were out of favour due to over-ownership, asset quality issues cropping up in them and sluggish credit growth,” Jasani told Moneycontrol. Also, the growing popularity of new-age fintech companies brought in some challenges to the business models and valuation parameters of private banks.

“The finance pack has been a laggard all through, largely earmarked by uncertainties in liquidity,” said Pushkaraj Sham Kanitkar, VP (equities) at GEPL Capital.

Healthcare

The healthcare sector including pharmaceuticals grew 14.8 percent, whereas pharma rose only 4.5 percent.

The muted performance of pharma came as the “Covid-related upside seen by some companies in 2020 evaporated in 2021 largely, except for a brief period in Q2 of CY21,” said Jasani.

Kanitkar of GEPL Capital concurred with Jasani and said, “Pharma was by far the beneficiary of 2020 given its 60 percent returns of CY2020 amid the spread of the pandemic.”

Also, US business remained sluggish for most companies as new drug launches were few and far between.

“Indian units under FDA (US Food and Drug Administration) watch did not get clearance and other treatments got postponed as Covid fears kept cropping up,” said Jasani.

Auto

“The auto sector among the non-defensives has taken a hit that was more to do with the semiconductor shortage as also the strategic shift to electric vehicles,” said Kanitkar.

The BSE Auto index, which rose 15.7 percent during the year, “had seen the momentum built up around the Diwali season, but chip shortages bogged the industry,” said Srivastava of Wright Research.

Power

On the other hand, the BSE Power index was the best-performing sector with a gain of 68.9 percent.

“As power demand kept rising, the focus shifted to renewables. Companies took measures to tweak their business models and deals globally in the renewable space lifted valuations generally,” Jasani said.

Metals

The BSE Metal index was up 65.2 percent as supply chain disruptions led to a rise in prices of finished goods. Higher spending on infrastructure and real estate also led to higher demand for metals. Raw material prices, however, started to dip in the later part of the year.

“The metal sector was all the rage at the beginning of the year as demand for metals rose globally due to the infrastructure push and commodity prices rose to multi-year highs,” Srivastava said.

The BSE SmallCap index moved up 56.7 percent “as comparatively reasonable valuations, low base and faster growth brought attraction to this space,” Jasani said.

Realty, IT

Realty, information technology and capital goods were the other top-performing sectors, growing almost 50 percent during the year.

The BSE Realty index grew 52.8 percent as listed developers saw brisk sales of residential properties resulting in lower inventories following demonetisation, introduction of the goods and services tax and the setting up of sector regulators. Low interest rates and stamp duty cuts in many states also helped the sector.

The BSE IT index rose 52.4 percent as demand for digitisation accelerated in Covid times and companies witnessed record deal inflows.

“IT companies managed to report healthy numbers helped by rising billing and a weak rupee,” Jasani said.

“The IT sector was a direct beneficiary of people working in a ‘work from home’ or hybrid model,” suggested Kanitkar.

The BSE Capital Goods index was up 49.5 percent as policies such as the Make in India initiative and production-linked incentive schemes helped demand for engineering goods.

Outlook

Experts said that in the new year, apart from sectors that performed well during 2021, there is scope for business and market interest to revive in some undervalued sectors.

“Banking and auto are two such sectors that have underperformed the market so far but have the potential to turn out to be dark horses in 2022,” said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services.

The underlying conditions of banks have improved this year with several banking reforms, improved credit quality and NPAs in the best zone in years.

The semiconductor shortage and the intensity of commodity cost inflation are expected to improve from the second half of FY22 for auto companies, which augurs well for growth of the sector.